The Potential Role of Carbon Labeling in a Green Economy
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Energy Economics 34 (2012) S53–S63 Contents lists available at SciVerse ScienceDirect Energy Economics journal homepage: www.elsevier.com/locate/eneco The potential role of carbon labeling in a green economy Mark A. Cohen a,b,⁎, Michael P. Vandenbergh c a Vanderbilt University, United States b Resources for the Future, United States c Climate Change Research Network, Vanderbilt Law School, United States article info abstract Article history: Over the past several years, labeling schemes that focus on a wide range of environmental and social metrics Received 30 January 2012 have proliferated. Although little empirical evidence has been generated yet with respect to carbon footprint Received in revised form 22 May 2012 labels, much can be learned from our experience with similar product labels. We first review the theory and Accepted 30 August 2012 evidence on the role of product labeling in affecting consumer and firm behavior. Next, we consider the role Available online 7 September 2012 of governments and nongovernmental organizations, concluding that international, multistakeholder organi- zations have a critical part to play in setting protocols and standards. We argue that it is important to consider JEL classification: D82 the entire life cycle of a product being labeled and develop an international standard for measurement and F18 reporting. Finally, we examine the potential impact of carbon product labeling, discussing methodological K32 and trade challenges and proposing a framework for choosing products best suited for labeling. L15 © 2012 Elsevier B.V. All rights reserved. M31 Q54 Keywords: Carbon labels Voluntary disclosure Consumer behavior Life-cycle analysis Rebound effect Leakage 1. Introduction retailers to promote green products. Recent examples include Kimberly- Clark's Scott Naturals (household paper products made from recycled Growing consumer interest in “green products” has led many compa- material)2 and Proctor & Gamble's goal of $50 billion in cumulative nies to develop and market products with environmental attributes. In sales of “sustainable innovation products” by 2012.3 2007, the U.S. Patent and Trademark Office saw more than 300,000 appli- A significant and growing proportion of the sustainability-related cations for green-related brand names, logos, and taglines (Ottman, product claims are now focusing on carbon emissions and climate 2011, 35). The number of new products labeled with the word(s) “sus- change. Moreover, carbon labeling of products is gaining considerable tainable”, “sustainability”, “environmentally friendly”,or“eco-friendly” interest. Pilot programs are being implemented in the United King- increased from 100 in 2004 to 526 in 2008, with an additional 450 prod- dom, Switzerland, Japan, and other countries, and there are proposals uct launches in the first four months of 2009.1 Representing a 39% in- to expand and standardize such programs globally (see Vandenbergh crease from the previous year, 6902 products on U.S. shelves in 2010 and Cohen, 2010; Vandenbergh et al., 2011). had some type of environmental claim, including 89 claiming to be car- bon neutral (Mintel Group, 2011, Fig. 1). Although the growth of niche brands such as Seventh Generation 2 “ ” and Burt's Bees continues unabated, perhaps even more important Kimberly-Clark Announces Nationwide Launch of Scott Naturals , press release, April 8, 2009, http://investor.kimberly-clark.com/releasedetail.cfm?ReleaseID=375980. is the movement by mainstream consumer product companies and 3 “Proctor & Gamble Deepens Corporate Commitment to Sustainability”, press re- lease, March 26, 2009, http://www.pginvestor.com/phoenix.zhtml?c=104574&p= irol-newsArticle&ID=1270272. The company has since released an even more ag- ⁎ Corresponding author. gressive long-term vision that includes use of 100% renewable energy and 100% re- E-mail addresses: [email protected] (M.A. Cohen), newable or recycled materials for all products and packaging. See “Proctor & [email protected] (M.P. Vandenbergh). Gamble Unveils New Sustainability Vision”, press release, September 27, 2010, 1 “Green Is the New Black”, Adweek, June 24, 2009, http://www.adweek.com/news/ http://www.pginvestor.com/phoenix.zhtml?c=104574&p=irol-newsArticle&ID= advertising-branding/green-new-black-105996. 1475092&highlight=sustainability. 0140-9883/$ – see front matter © 2012 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.eneco.2012.08.032 S54 M.A. Cohen, M.P. Vandenbergh / Energy Economics 34 (2012) S53–S63 This paper examines the role of carbon product (“carbon foot- ultimately misleads consumers into thinking that the product is print”) labeling in promoting a green economy. While little empirical “greener”, or of higher quality, than it is.5 Darby and Karni (1973) recog- evidence has yet been generated with respect to carbon footprint la- nized this problem and examined the potential role of third-party mon- bels, much can be learned from our experience with similar product itors to evaluate and report on credence qualities. They conclude labels. We first review the theory and evidence on the role of product that if the value of information is high enough to consumers, labeling in affecting product design and consumer behavior. Next, we “high-quality” firms will find it in their interest to disclose this in- consider the role of governments, concluding that whether labeling is formation, and a market will develop for third-party monitors— mandatory or voluntary, either governmental institutions or interna- whether governmental, private, or nonprofit—to verify the truthful- tional, multistakeholder organizations have a critical part to play in ness of this information. As Darby and Karni (1973) note, there is no setting protocols and carbon-labeling standards. We argue that it is inherent reason why this third-party monitor needs to be the gov- important to consider the entire life cycle of a product being labeled ernment. In fact, they conclude that the private (or non-profit) sector and have one international standard for measurement and reporting. could be as effective and potentially more effective than a govern- Finally, we look at the potential impact of carbon product labeling, ment monitor. considering three important issues. First, we examine some of the A related literature examines firm incentives to voluntarily dis- methodological challenges associated with developing credible car- close credence product attributes in product-differentiated markets. bon footprint labels. Second, we consider the potential trade issues As Ippolito and Mathios (1990) show, if one firm can credibly claim associated with carbon footprint labels. Finally, we sketch out an ini- to have a better-quality product (e.g., one that is pesticide free), tial framework for determining which products might be most appro- then the implication to consumers is that competing products with- priate for carbon footprint labeling based on the potential aggregate out that claim do not have that positive attribute. Hence, there is an reduction in carbon emissions. incentive for all firms to compete on that dimension. Ultimately, all firms but the lowest quality will thus have an incentive to disclose. As noted above, the credibility of firms' claims about credence attri- 2. Economic theory of information and product labels butes is a concern. In addition to the direct impact on consumer demand, labeling The economic theory behind the demand for consumer product might bring about an indirect source of demand for lower carbon prod- labels is well established. A traditional utility-maximizing model of ucts through the supply chain. Quality competition among consumer consumer behavior assumes that the rational consumer will choose product firms will provide an incentive for suppliers to innovate and a combination of price and quality that is consistent with her utility offer firms reduced carbon content inputs so that the ultimate product function and constraints. An important assumption of utility maxi- can have a better carbon label. Although we are unaware of any theoret- mization is that consumers have perfect information about the ical literature on this topic, there is ample evidence of downstream price and quality they face. But although consumers easily can de- companies encouraging, assisting and/or pressuring their suppliers to termine quality attributes, or “search” goods, such as color or size, reduce their carbon footprint.6 they do not necessarily observe “credence” goods—the ingredients Baksi and Bose (2007) consider whether self-reporting of credence of a product and their potential harm to the consumer's (or attributes (with governmental monitoring and punishment of cheaters) public's) health—either at the point of purchase or through casual is preferable to third-party certification. Since both are costly, their re- experience (Darby and Karni, 1973; Nelson, 1970).Theroleofprod- sults depend on these costs as well as the relative market share of uctlabelsisthustoturna“credence” attribute into a “search” attri- “green” versus “brown” firms. They conclude that self-reporting is pref- bute so that consumers easily can compare and make more erable when the market share of “green” firms is large enough that any informed (utility-maximizing) decisions. loss from cheating by “brown” firms is outweighed by the cost of mon- For consumers, if the value of additional information exceeds the itoring by third parties. A more realistic scenario, however, is that the cost of search,